Remaking retail banking?

Over a long period of time the financial services industry has been celebrated as one of the UK’s few globally competitive industries. During the 1990s it was embraced by the Labour government in a Faustian pact wherein the City would be allowed to run free, encouraged in its competition for financial centre pre-eminence with New York through a deregulatory arms race. In return, the government would hoover up tax revenues derived from the profits, salaries and bonuses of the booming financial services industry, which could be used to fund other activities, including investment in public services in those regions beyond the booming south of England. The former reservations earlier incarnations of Labour might have had about finance were cast aside. As Peter Mandelson, a leading figure in the party over the past 25 years famously observed, Labour was ‘intensely relaxed’ about people becoming filthy rich, as long as they paid their taxes.

However, in the wake of a financial crisis and the loss of office, it seems that the Labour Party has shifted its position both on the financial sector and the filthy rich, not least because its seems that many of the latter were doing all they could to pay as little tax as possible. Responding to the growing public distaste for financial excesses and malfeasance in an era of austerity, Ed Miliband, Labour leader, and Ed Balls, Shadow Chancellor, used the latest UK financial scandal – the fixing of LIBOR rates by employees of Barclays Banks, which resulted in the exit of its chief executive – to launch their reconsideration of the social and economic role of the banking sector. They argued that retail and investment (or ‘casino’) banking should be forcibly divided along the lines of the recommendations of the 2011 Independent Commission on Banking which would free the state from the responsibility to bail out banks ‘too big to fail’ but also allow retail banking to be recast as a more benign supportive activity for the rest of the economy, which Miliband described as ‘Stewardship banking’, and would see banking once again become a trusted and respected profession and public servant, on a par with teaching, medicine and law. Balls and Miliband also argued that the UK needs a more competitive retail financial sector, to improve the lot of consumers, with the creation of at least two ‘challenger banks’ that could be given a head start by forcing incumbent banks to hand over some of their branches to create a ready-made banking network. In addition, Labour seem to be returning to the issues of financial exclusion and inclusion, an area of policy they championed while in office, but which in practice was limited by an implicit agreement that it should not derail the competitiveness of the sector nor do anything that would seem unduly at odds with a market-oriented sensibility. Now, in opposition, Labour seems to be gearing up for a much more direct engagement with the problems of financial exclusion, with Miliband referring indirectly to the US Community Reinvestment Act suggesting that government could force UK banks to disclose information on the geography of their lending behaviour to identify socio-spatial exclusionary practices, arguing that ‘Some of the most deprived areas of the country are currently almost entirely excluded from banking services’.

On the one hand, this refocusing on financial exclusion and inclusion is to be welcomed, not least because it has not been a priority of the Coalition government since 2010. In part this is because of the pressing problems of the financial crisis more generally, but also because, as Conservative politicians have admitted off the record, that financial inclusion is so associated with Labour that it is difficult for the present government to embrace it. In addition, the focus on the geography of financial exclusion is also welcome, not least because significant research on this subject has been undertaken at the School of Geography at the University of Nottingham over the last decade and more, research which has been supported by the University’s Financial Services Research Forum. Indeed, we are currently in the process of undertaking an update of our longitudinal database of bank and building society branch locations in Britain which goes back to 1989 and reveals the extent to which leading retail financial institutions have pruned their branch networks. This a process has been geographically uneven with closures focusing disproportionately on areas of economic and social deprivation.

On the other hand, however, Labour’s recommendation that the leading banks be forced to hand over a significant proportion of their branches to two new challenger banks may not be as punitive a sanction that it appears. Branch divestment has been an objective of the leading banks over the past 25 years, so while the enforced sale of branches to new competition may mean the loss of some branches in prime locations, the loss of physical infrastructure is hardly something that goes against the grain of the UK retail banking industry. More important would be the location of those branches, so a divestment policy such as this would have to be careful not to expedite the shedding of infrastructure in locations that banks would be all too happy to abandon, and where they may be maintaining a presence in part to avoid the bad publicity that is generated when they close the last branch in a community, a process that has been well documented over many years by the Campaign for Community Banking. But even if challenger banks inherited a representative sample of branches, banking is more than simply managing a portfolio of real estate. There was a time when branch networks acted as an effective barrier to entry within retail banking, because it was in branches that the key work of the business went on, where credit risks were assessed, money was deposited and loans were made. Branches were central to banking business. Banks and building societies needed an effective branch network to compete. However, in the past 20 years or so power has ebbed away from branches as the core competencies of retail banking are having effective credit scoring and customer relation management systems, both of which enable banks to manage their customers at a distance. Moreover, banks are now not so reliant on branches for raising funds in the first place, as these can be raised directly in financial markets although, as thinly-branched banks such as Northern Rock found out to their cost, in times of crisis when capital markets dry up, having access to a reliable supply of branch-based deposits can make the difference between survival and going out of business. But, while the gift of an already-existing branch network would help a challenger bank, it would not be sufficient in itself.

Therefore, while Labour’s reconsideration of the banking sector has the potential to be an important break point in public policy, to be effective it requires a consistent attention both to the uneven geographies of financial provision and the contemporary practices of 21st century retail banking.